Beijing builds ties with Latin countries (China is expanding military and throughout Latin America

China is expanding military and economic ties throughout Latin America, taking advantage of a wave of anti-American candidates who have come to power and a U.S. law barring military training and aid to a dozen Latin countries.

"China's profile in the region has been ratcheting up sharply," said Thomas Shannon, assistant secretary of State for Western Hemisphere Affairs. Shannon traveled to China last month to discuss with Chinese leaders their country's growing role in the United States' backyard. He was the first U.S. official in his position to do so. "We thought it was a good time to talk," Shannon said.

China's trade with Latin America was $40 billion in 2004, a 54% increase over 2003, according to the Inter-American Dialogue, a Washington think tank. China is investing more in Latin America than any region outside Asia, according to a 2005 study by the consulting firm Booz Allen Hamilton.

Army Gen. Bantz Craddock, head of U.S. Southern Command, told the House Armed Services Committee in March that China's military is stepping up its involvement, "offering resources to cash-strapped militaries and security forces with no strings attached."

China has had exchanges of senior defense officials with Ecuador, Bolivia and Chile and provided military aid and training to Jamaica and Venezuela, according to Jose Ruiz, a spokesman for Southern Command.

China's ambassador to the United States, Zhou Wenzhong, said U.S. fear of China's role in the region is "unnecessary."

He told the Council of the Americas on Wednesday that Chinese investment in the region is $4 billion, compared with $300 billion by U.S. companies, and that "a stable and prosperous Latin America is in the shared interests" of China and the United States.

However, in 2004, Chinese President Hu Jintao announced that China planned to invest $100 billion over 10 years in Latin America.

China sees Latin America as an important source of natural resources, including oil, nickel, copper and iron ore, as well as foodstuffs such as soybeans.

China's growing role coincides with elections that have brought populists and leftists to power in Venezuela, Brazil, Argentina, Uruguay and Bolivia. A populist is leading in Peruvian elections this month, and Mexico and Nicaragua may choose candidates hostile to the United States later this year.

A 2002 U.S. law bars the United States from giving military aid and training to countries that have refused to promise immunity to U.S. servicemembers from prosecution by the International Criminal Court.

The Bush administration refuses to participate in the Netherlands-based court, which was founded in 1998 to prosecute crimes against humanity. The U.S. government worries that U.S. personnel might be subject to unfair prosecution.

Under Bush administration urging, 98 countries have promised immunity to Americans. Twelve countries in the hemisphere - Mexico, Barbados, Bolivia, Brazil, Costa Rica, Ecuador, Paraguay, Peru, St. Vincent and the Grenadines, Trinidad and Tobago, Uruguay and Venezuela - have refused. Those countries had in the past received U.S. training or aid, Ruiz said.

Secretary of State Condoleezza Rice said on a recent trip to the region that the result of the law has been "the same as shooting ourselves in the foot."

Shannon said the Bush administration is considering exercising a provision in the law that allows the government to waive the rule and restore military aid. "The proper response (to China's expansion) is to make sure we're engaged in the region," Shannon said. "Our intention is to work with everybody who wants to work with us."

SPECIAL REPORT
April 24, 2006
China Doubles
Latin FDI

China's direct investments in Latin America have grown dramatically and are expected to continue growing
at strong rates over the next few years as well.

BY CHRONICLE STAFF

Chinese companies spent $6.9 billion on overseas direct investments last year, reaching a cumulative total of $50 billion. While a regional breakdown is not yet available, Latin America is likely one of the main beneficiaries.

China: Latin America's new partner

Relations between China, the world's fourth-
largest economy, and Latin America are growing
fast. Here, represented by Chinese President
Hu Jintao and Brazilian President
Luiz Inácio Lula da Silva.

Photo: Ricardo Stuckert/Brazilian President's Office.

Quick Links
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Free Trade and Poverty

According to a new report from US-based consultancy Global Insight, cumulative Chinese investment in Latin America reached $8.3 billion in 2004, an increase of 79.0 percent from 2003. (The Chinese government has not yet published disaggregated overseas direct investment figures for 2005).

Latin America's share of Chinese direct investments will grow from 6.4 percent today to 17.0 percent within the next 12 months, according to the report, Going Outside, Round-Tripping and Dollar Diplomacy: An Introduction to Chinese Outward Direct Investment. Latin America will gain its share at the expense of North America and Asia. Over the next two to five years, it will fall somewhat to 11 percent, due to stronger growth in Chinese investments to Asia.

Chinese FDI in Latin America is expected in sectors related to energy, mining and food products and infrastructure, according to the UN Economic Commission for Latin America and the Caribbean (ECLAC).

The Chinese investment boom in Latin America comes as China's trade with Latin America is also growing dramatically. Chinese trade with the region has now reached $50 billion and Chinese officials want to raise that to $100 billion by 2010, according to a report in Voice of America last week. Latin America's exports to China grew by 45.9 percent in 2004 to $21.7 billion, while imports from China grew by 53.0 percent in 2004 to $17.9 billion, according to a Latin Business Chronicle analysis (See US-Latin Trade Boom).

China's trade with Latin America will be spurred by continued strong demand of raw materials from Latin America and improved trade conditions. Chile and China signed a free trade agreement in November and Brazil has declared China a Most Favored trading nation.

RECENT INVESTMENTS

Among the most recent examples of China's investment in Latin America is the planned $2 billion investment in in Chile in a joint venture with local mining giant Codelco (the world's largest copper producer). Under terms of the deal, announced in February, China Minmetals Non-ferrous Metals (Minmetals) will buy copper from Codelco through a 15 year contract. The joint venture, Copper Partners Investment Company (CuPIC), will guarantee deliveries to the copper hungry Chinese, who will make an initial investment of $550 million.

Meanwhile, China-based Shandong Gold Mining announced in March it was investing $13 million to explore gold mines in southeast Venezuela starting in December. Its Venezuelan subsidiary JinYan expects to start producing almost 300 metric tons of minerals a day and will increase that to 500 metric tons within eight months, according to a report from the Associated Press, quoting company officials.

Mining is by far the main focus of Chinese overseas foreign investment, accounting for 32 percent of the total 2004 investments, according to Global Insight.

The Chinese investments in Latin America and elsewhere are fueled by a combination of excess liquidity, growing competition at home and a supply shortage of key energy and raw materials.

"China has become a key consumer of a wide range of commodities, and it is therefore natural to expect domestic firms to purchase natural resources, in addition to entering into enormous long-term purchase contracts," the report says.

PERU TOP RECIPIENT

Peru was the top recipient of Chinese direct investments in Latin America in 2004, accounting for $126 milion, followed by Mexico, with $125 billion. The two Latin American countries received more Chinese investments than countries like Spain, Russia and Malaysia, and only barely ranked behind a country like Germany, the report shows.

Shougang Hierro Peru, a subsidiary of Chinese steelmaker Shougang Corp, is one of Latin America's leading iron ore producers.

The 2005 figures will likely show a boost in Brazil and Ecuador, which have benefitted from major deals the past year. Andes Petroleum Company (a joint venture of Chinese oil companies) last year acquired the Ecuador assets of Canadian natural gas producer EnCana Corp for $1.4 billion in what became the fourth-largest M&A deal in Latin America. (See Top 100 M&A's in Latin America).

There are three kinds of Chinese investments in Latin America and elsewhere, Global Insight says.

Under the first model, a Sino-centric resource acquisition model, a state-owned company acts on behalf of China's economic and political interests in a commercial capacity, to procure energy, agricultural or other raw materials. "In many cases, additional supporting investments and trade are made in the infrastructure (roads, railways, pipelines) necessary to take the extracted resources home; examples of this can be found in Brazil, Chile and Sudan," the report says.

IMPORTS OWN COOKS

However, this model is often highly Sino-centric, meaning that the state-owned, Chinese company goes so far as to import its own technical personnel, wrench-turners and even cooks, in order to maximize operational control and minimize cultural issues, according to Global Insight. "The benefits, in terms of employment and technology and managerial transfers, are limited, causing a degree of resentment among local workers, who become spectators to Chinese labour," the report points out. "This model has often been employed in highly authoritarian regimes, and/or those where the host state owns or controls the resources in question. Low-cost financial resources are made available to the national firm. In some cases, equity investment in upstream or resource-oriented acquisitions are accompanied by long-term purchase agreements."

The second model, a distressed brands and intagibles purchase model, entails competitive Chinese companies acquiring well respected brands in trouble. Although the Chinese companies may be competitive, they still suffer from quality images (similar to what Korea did for many years until the recent successes of brands like Samsung and LG).

One major example of this model is the acquisition last year of IBM's PC business by Lenovo. Lenovo currently lags behind HP and Dell in terms of PC sales in Latin America. Although Lenovo will suffer from having a brand that is less known than IBM in Latin America, they will benefit immediately from having many skilled professionals and their networks.

USING NAFTA

The third model, a foreign market access model, entails that a Chinese company attempts to bypass tariffs and other trade-restricting measures, or takes advantage of regional trade groupings by making an investment in a third-country market.

"The most prominent example of such investments by Chinese firms have taken place in Mexico, where Chinese producers have essentially invested in the North American Free Trade Agreement (NAFTA) through production operations in the Latin American country," Global Insight says. "This is often a good path for growth, as industrial redundancy, overcapacity and hypercompetition provide unattractive returns on investment in gaining domestic market share."

In many cases, the Chinese government has used investment projects for political reasons, ranging from so called 'dollar diplomacy' in Latin America to energy investments in Cuba, which Global Insight calls a "diplomatic thumb in the eye".

BIG PROMISES: Chinese president Hu Jintao has pledged to invest $20 billion in Argentina. Here during a visit to Argentine president Nestor Kirchner.

Photo: Argentine President's Office

"Perhaps the best example of this 'dollar diplomacy' occurred during [Chinese president] Hu Jintao's tour through Latin America in 2004, during which time he promised $100 billion in Chinese investment for the region, including $20 billion for Argentina alone," the report says. "China's actions were partially motivated by a desire to pressure the 12 countries in the region that still recognize Taiwan as independent to change their votes."

China's material needs also appear to have renewed an interest in old concepts such as "solidarity" with the developing world, Global Insight adds.

Last, but not least, China has been eager to "buy" the grant of "market economy status" from its trade partners, according to the report. So far, Argentina, Brazil, Chile, Peru and Venezuela have granted China such status, which makes anti-dumping actions against China at the World Trade Organization (WTO) more difficult.

CHALLENGES

However, China faces several major challenges in Latin America, Global Inisght points out. First, several governments have expressed frustration over the delays in the promised investments from China. At the same, time there is growing tension between China and its Latin American trade partners over the uneven balance of trade flows.

"Many host governments have indicated that the distribution of "mutual" gains is uneven, in China's favour," the Global Insight report says. "China's entry into emerging market natural resource markets has sparked comparisons to Latin America and Africa's imperial past, and despite the fact that China has played up its non-interference in local politics, its 'China first' strategy has been losing its appeal."

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